Business Model Jumia – In 2017, Safaricom launched Masoko, an eCommerce marketplace. It was de-prioritized in 2020 after failing to meet expectations.
I worked on Masoko until 2019 so I had an inside look at his struggles. There are several explanations for why it has struggled in the consumer market.
Business Model Jumia
The main reason it fell short of the company’s expectations was a lack of understanding of how marketplaces make money, which led to optimistic projections and undisciplined cost management.
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This is the first in a series of posts on the different types of profit models in the eCommerce space. Here we focus on understanding which activities bring in money and which lead to costs. The nuance or uniqueness of business models is beyond the scope of these posts.
PS: I won’t get into the economics of customer acquisition and retention or how to build a marketplace.
When a website facilitates a transaction between two parties, it becomes a marketplace. Jumia, Amazon and Etsy connect buyers and sellers. Uber and Bolt connect riders and drivers. Airbnb connects travelers and homeowners.
Marketplaces work best when the market is highly fragmented. This means that there are many buyers and sellers. They also work best when the consumer is indifferent to the supplier. The customer is willing to buy from any supplier that can meet his quality and price requirements.
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Ads typically do not process transactions between buyers and sellers. Transactions take place offline or through third-party payment methods such as third-party escrow. This reduces the liability of classified platforms for the actions of malicious users.
Unlike advertisements, marketplaces process payments for transactions on their websites. In most cases, the customer pays for the good or service through the marketplaces, not the sellers. They participate in the transaction, thereby increasing their responsibility. If you don’t get what you paid for, they can give you a refund.
It is important to note that commission income is often not enough to sustain the market. Successful marketplaces have multiple revenue streams that supplement their commission income. This is why some marketplaces charge delivery or payment processing fees. Additional income is key.
A product market that only makes money from its customers is probably not optimized. Such a marketplace is also likely to lose money with each order delivered.
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The ideal situation is to make money from both sellers and buyers. However, making money from both sellers and buyers does not guarantee profitability. However, it increases your chances of profitability at the gross margin level.
This is the value of all goods sold on the site in a given period. Cost of goods sold multiplied by quantity sold.
When selling online, it goes without saying that you have a return policy. These return windows affect when you can recognize sales revenue.
Due to troubleshooting, some deliveries may not take place. Some customers also chose cash on delivery, then did not pay for the item, resulting in the order being cancelled.
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These are fees paid by customers for the delivery of goods. As mentioned earlier, this is an additional source of income; therefore, it is added to the marketplace commission.
Additional revenue could be generated from fees charged to sellers. These are from services such as advertising, photography or storage fees and other professional services.
Combine advertising, cost discounting and general expenses. Then subtract them from the gross profit after fulfillment (GPF) to get the net profit or loss.
First, it is important to note that Jumia is NOT a pure marketplace. They don’t just sell products from other sellers. They sell some products as first-party sellers; that is, they buy some goods wholesale. Break them down and sell them at retail prices. Despite this, its financial statements are structured as closely as possible to the market.
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Jumia has diversified its profit model by introducing several revenue lines. These include revenue from first-party sales, advertising, value-added services, and shipping fees.
In total, Jumia posted a loss of €5.35 ($6.42) per order sold in 2020. This is a significant improvement over the loss of €8.6 ($10.3) per order in 2019.
Jumia’s advertising, payments and logistics businesses have achieved their first gross profit after fulfillment since its launch 8 years ago. If these additional revenues continue to increase, the business will definitely be profitable in a few years.
Service markets are similar to product markets, except that their suppliers provide a service rather than a physical product.
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Uber and Airbnb are the most famous service marketplaces. Others in Africa are Glovo, Kobo360, Sendy, Eden, SweepSouth, Yep and many more.
The profit model of a service marketplace is only different from that of a product marketplace, which means they have more revenue levers to work with and may not have any fulfillment costs.
Overall, service marketplaces have a better path to gross profitability, but the real problem for service marketplaces is product-market fit.
Gross merchandise value is a metric of vanity. It hides a lot of details. Focus on the other metrics listed above.
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Product markets may struggle due to supply costs. In the example above, we saw that Jumia earns a combined €2.9 in commissions (€1.74) and shipping fees (€1.16) per order, but spends €2.48 in order delivery. Therefore, reconsider any promises of free delivery, or at least understand what it means for your business.
In the beginning, make sure you have enough funding to sustain your business. It is doubtful that sellers will be willing to pay for services on an untested site.
Customer promises of free and fast shipping, cash on delivery and cash back can pay off in the future, but they need to be funded today.
Compare your board and/or investors by length of payback period. It will take many years.
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Track your revenue or loss per order, commonly referred to as unit economics. If your business loses money on every sale, success could kill it.
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African eCommerce Round-up #4 This is a fortnightly round-up of news, events and investments happening in the African eCommerce and retail technology space. This edition covers July 14-28, 2021. ?Investments & Exits South Africa ??: Payments company Yoco has raised an $83 million Series C investment round. Yoco has specialized in Jumia Technologies (NYSE:JMIA) in the past and has had dismal financial results in recent quarters with stagnant growth and usage metrics. This led to a sharp selloff in the stock as the stock has lost nearly 70% this year, with the stock price down more than 80% from its all-time high reached in Q1 of this year.
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This article will look at Jumia’s latest business metrics which suggest that the company may have reached an inflection point in its growth trajectory along with a significant increase in spending.
In our latest article, we urged Jumia’s management to do just that, i.e. increase their investment to steer the business back to growth. You can read the article here:
Since we won’t be going into Jumia’s business in too much detail in this article, we encourage interested readers to also check out our earlier articles on the company where we outlined various aspects of the business in more detail. See here:
Now let’s dive into the meat of this article to highlight that Jumia’s business may have reached an important inflection point with a return to growth.
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During the most recent quarter (Q3), Jumia reported encouraging performance across key metrics, indicating accelerating usage growth, as summarized below:
This compares to year-over-year GMV declines of negative 13% in Q1 2021 and negative 11% in Q2 2021.
Total revenue for the quarter also accelerated, rising 8.5% year-over-year to $42.7 million. However, it’s still worth noting that Q3 revenue growth was largely attributable to first-party revenue growth of >40% (which management has emphasized multiple times can fluctuate over time) and 113% growth in other revenue, as shown below:
Naturally, commission income continued a negative downward trend as the company continues to shift market business from higher-priced items with infrequent purchases (such as smartphones and other electronics) to higher-frequency items from the digital services and FMCG categories. (FMCG) which have better unit economics.
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Growth trends by product category illustrate the continued evolution of this strategic shift that Jumia’s management implemented a while ago. During the third quarter, digital services (which includes digital and financial services offered through JumiaPay products) and FMCG products were actually the fastest growing category in terms of items sold with the highest ever volume during the quarter, almost doubling year-on-year. This was partly due to strong dynamics
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